The domestic mutual fund industry is shell-shocked at the discriminatory treatment meted out to investments in mutual funds, as against direct investment in the stockmarket.
While direct investment in the equity markets, through trades on recognised stock exchanges, have been exempted from long-term capital gains tax and the short-term capital gains tax has been reduced to 10 per cent, profits from trading in mutual fund units do not qualify for these concessions.
Meanwhile, debt fund houses are planning to approach the finance ministry to exempt debt market transactions from the transactions tax.
AP Kurian, chairman, Association of Mutual Funds of India, said, "Exempting long-term capital gains from taxes and reducing short-term capital gains tax to a uniform 10 per cent seems to apply only to securities traded on the stock exchanges. Mutual funds are not traded on the exchanges, so going by the technical definition, it would appear that these concessions are not applicable to mutual fund units. This is highly discriminatory and will affect the mutual fund industry in the long-term." We expect to get a clarification soon, he added.
Sanjay Prakash, chief executive of HSBC Mutual Fund said, "there is no level playing field provided with direct equity investments in terms of tax breaks available, and in that sense, it is a negative for us."
Equity assets, which do not make up even one-fourth of the total assets (Rs 14 lakh crore) of the mutual fund segment, are coveted by the players, because that is where the profits come from. Providing tax breaks for direct equity investments would further discourage investments in equity schemes.
However, according to Sandeep Dasgupta, head of Deutsche Asset Management India Ltd, "The class of investors in mutual funds is totally different from those who invest directly in equity."
He pointed out that those who have sufficient expertise in such investments, would not be the real customers for mutual funds.
Only investors not having sufficient expertise in direct dealings, but not having the time to monitor their investments either, come to the mutual fund industry.
"Plus, if you look at it with a long-term perspective, the returns from mutual funds are always greater than in the case of direct investments," he said.
However, he admitted that high net worth individuals would definitely make a shift from mutual fund investments to portfolio management services, where they get the best of both worlds -- an efficient fund management team, and tax breaks of direct equity investments.
However, most asset management companies have launched their own portfolio management schemes. So, in actual terms, the money would just get transferred from the mutual fund to the portfolio management schemes, fund industry sources said.
Though their income streams will be protected, the migration of the high net worth individuals will affect the fund mobilisation of fund houses.
Naval Bir Kumar, managing director, Standard Chartered Mutual Fund, said that so far, corporate investors had shown no signs of withdrawing from the debt schemes. Stanchart MF is the only debt-driven fund house, and does not invest in equity.
Most corporate investors in bond funds are in the growth schemes. As a result, there would not be much of an impact there, Naval Bir Kumar said.
However, in the cash and liquid funds, the corporates opt for the dividend schemes, since this is where they do most of the arbitrage.